1. The M&A JournalThe independent report on deals and dealmakers Volume 16 Number 1
A Tipping Point?
Dealmakers are pondering
just what part of the M&A cycle
lies ahead. As has been noted by
several studies of the third quar-
ter’s results, the penultimate
three-month period of 2015 was
the third best in recorded history
with $1.22 trillion in announced
deals. The total for the first nine
months of the year hit $341
trillion, the silver medal in its
category. The numbers are just
five percent behind the magical
highs of 2007. But as close as the
numbers may be for 2015 and 2007, that was
then and this is now. “Mega-headline deals
have certainly been fast and furious at a pace
and quantity not seen since 2007,” says Alan
Klein of Simpson Thacher, a member of the
firm’s executive committee. “But it’s a very
different climate than it was in that record
year.”
Mr. Klein points to three significant char-
acteristics of 2015 that distinguish it from
2007. First, M&A eight years ago was driven
by huge LBOs. This year has been domi-
nated by massive strategic transactions. The
largest of the 2015 behemoths have thun-
dered forth from the pharmaceutical sec-
tor, with more than $850 billion announced
since the beginning of 2014. In mid-October
of this year, however, the Financial Times
reported that “investors may be turning sour
on deals,” with more than half of healthcare
companies that proposed a deal in the past
three months “have been punished with a
next-day decline in their share price. The
twitchiness revealed itself on the Nasdaq
biotech index after Secretary Hillary Clinton
said she would fight high drug prices. In
the three weeks since that pledge, $130 bil-
lion has dissolved away. Nevertheless, two
of the largest drugstore chains
in the country seem undeterred.
On October 27, Walgreens Boots
Alliance, represented by Simpson
Thacher, announced its plan to buy
Rite Aid for roughly $9.4 billion in
cash. Walgreens last year bought
Duane Reede, Kerr Drug and USA
Drugs and now runs 8,200 stores
with revenue of $76 billion. The
next day, reports surfaced that
Pfizer and Allergan were explor-
ing the possibility of a deal. With a
market capitalization of $112.5 bil-
lion, Allergan may turn out to have sparked
the largest announced takeover of the year.
The global nature of the pharmaceutical
market, pricing pressures in the US market
and from governmental health care systems
around the world and the constant need to
add new drugs to a company’s pipeline have
all created the pressures driving the wave of
consolidation in the pharma sector.
A second difference between 2007 and
2015, Simpson’s Mr. Klein posits, is the pau-
city of private equity deals this year. “The
proportion and dollar value of transactions
by private equity firms is way down,” Mr.
Klein notes. “The numbers are below what
they have been over the last couple of years,
below historical standards, and far below
their peak in 2007.” He ascribes this feature
of today’s market to two factors. Prices are
high and private equity firms worry that the
returns they need will therefore be difficult to
achieve. They can’t compete with the power
of strategic buyers in this market, given their
rivals’ ability to cut duplicative expenses
when they combine with a similar business.
“Strategic buyers can simply pay more than
private equity because they are able to enjoy
contents
SEPTEMBER/OCTOBER, 2015*
A Tipping Point 1
Alan Klein of Simpson Thacher
examines where dealmaking is
headed over the last months of
a booming 2015.
Strategic Success 3
Executives involved in decision-
making on key corporate
acquisitions need to ask not
“Are we doing things right?”
but instead “Are we doing the
right things?” So say Todd
Antonelli and Paul Feiler of
Berkeley Research Group.
Hot Off the Grill 12
Gibson Dunn leads a seminar
on restaurant deals, often
seen as a barometer of M&A.
Deals in this sector are roaring
along. But, asks panelist David
Chandik of Piper Jaffray, “The
real question is what does
that mean? What does the
future look like? Is there an
opportunity to go up? Will it go
flat, or go down?
*The M&A Journal is published
approximately every six weeks, with ten
issues per volume. The sequence of issues
is therefore tracked by volume and issue
number, rather than by month. Tipping Point
Alan Klein
Simpson Thacher

2. The M&A journal
2
those savings.” Finally, what separates 2015 from
2007 is the fact that the dollar value of M&A may
be massive but the activity is concentrated in a
relatively smaller number of deals. “The actual
number of transactions is virtually flat, if not
slightly down.” Mr. Klein says. “The last two
years have seen a very vibrant M&A market. Last
year was the second highest level of activity since
2007, and this will be even larger than that. But,
there are these twists, with strategic deals domi-
nating the business, with deal value up but deal
volume less impressive, and private equity for
the most part on the sidelines.”
Where is all this headed? “The answer to
that question depends on where we are in the
M&A cycle, because it is an endless cycle,” Mr.
Klein says. After the financial crisis, there was
very little CEO confidence that transformational
transactions would be welcomed by the market.
Companies were expected to hunker down and
conserve cash. Most increases in profits came
from cuts in expenses. If you have the same
amount of revenue but you can eliminate some
of the costs of generating it, then profits grow.
This can only go on so long, however, until prof-
its from expense reductions taper off and com-
panies turn again to acquisitions. “If you buy
another business or buy another company—and
it is one that you can operate effectively—you can
cut expenses through an acquisition,” Mr. Klein
explains. “Those cuts can make sense. You don’t
need two CFOs, or two accounting departments,
or two sets of in-house lawyers. There is obvi-
ous overhead to cut.” The recent M&A boom, he
points out, has been powered by CEO confidence
and market enthusiasm for acquisitions. “We’ve
moved into a period in which, if you’re able to
say that a deal is going to be accretive, primarily
because of expense synergies, then the market
gets extremely excited. That gives CEOs confi-
dence that they should be out there doing deals.
That pressure intensifies when the market starts
to believe that if you’re not out there doing deals,
then your company is falling behind.”
The two forces of CEO confidence in M&A and
market enthusiasm for deals are driven by the
low-growth economy and the low-growth recov-
ery. In the years immediately after the financial
crisis, CEOs had to let tempting deals pass them
by because the market was wary of any risk, par-
ticularly major acquisitions. “Once you cut out
all the expenses you can possibly dispense with,
and you need to show continued earnings and
growth in such an economy, then CEOs and the
market turn to acquisitions as the only possibility
that makes logical sense,” Mr. Klein says. CEOs
have been waiting on the sidelines to do transac-
tions that were obvious and desirable, but which
the market would have viewed with suspicion.
As a result, there was a backlog of healthy, smart
transactions waiting on the runway. The market
began to favor deals as a way to increase profits
and share prices, and suddenly M&A became hot
once again. Says Mr. Klein: “That accounts for the
ramp-up in transactions, and has brought us to
the point where we find ourselves today.”
Have we reached a tipping point? There are
signs that the transactions that were obvious and
compelling have been worked through. “We’re
starting to see transactions,” Mr. Klein says, “that
are ever so slightly more challenging, deals that
are less centered in the acquiror’s core compe-
tency, that face more daunting regulatory issues,
and a more demanding geographical reach. The
fail rate of deals that are discussed but not signed
up seems to be slightly higher. Targets are turn-
ing down offers. Regulators are causing more
difficulties, because this type of transaction is
harder to get across the finish line.”
What’s more, when times are good and confi-
dence is soaring and M&A is thriving, there is a
tendency to overlook events in the world outside
of M&A. “When people start getting a little more
nervous or thoughtful, some of those concerns
start seeping into consciousness,” Mr. Klein says.
“Syria, the Ukraine, the Euro crisis, Afghanistan,
the Chinese economy—six months ago, those
issues were out there, but people were paying
absolutely no attention.
Over the summer, the market itself began to
worry about all the troubles around the globe
and that concern caused a great deal of volatil-
ity in the stock markets. Volatility has a direct
affect on the level of confidence and enthusiasm
among CEOs as they contemplate transforma-
tional deals. This is not true of all CEOs. It is not
true for all deals. But some people start to worry.
Then a few more get concerned and then a few
more. Then M&A looks like a spinning top that
starts to slow down. Then it starts to wobble. And
then it falls over.”
Mr. Klein adds that nothing is certain. Take the
issue of interest rates. If the Fed says the economy
is too insipid for rates to rise, that could help
bring on more worries for dealmakers. If rates
do increase, they are likely to do so slowly and
slightly, and dealmakers might rush to get in the
game before the cost of money rises more sig-
nificantly. Global trouble spots could calm down.
One or two successful deals in a somnolent sector
Tipping Point
continued

3. could extend the frenzy. Pharmaceutical deals
could subside, but telecom and technology, for
example, could ignite a new momentum. There
are signs, however, that M&A is at something of
an inflection point. Says Mr. Klein: “There is no
guarantee that the deal market in three months
or six months, much less a year, is still going to
be as robust as it is now.” Nothing is ever dull in
M&A, Mr. Klein notes, nor is it ever easy to fore-
tell where dealmaking will turn next.
As Yogi Berra is said to have said: Predictions
are always tricky, particularly when you’re talk-
ing about the future—and particularly when
you’re talking about the future of M&A.
MA
You’ve sat at the closing table. You know the
feeling of euphoria when a deal gets done. It
could be late afternoon, evening, even midnight.
The ink is drying, handshakes begin, and some-
where a cork is popping.
How soon will that euphoria evaporate,
though, when returns on investment are unend-
ingly deferred? For the executive involved in
corporate strategic acquisitions, that’s a criti-
cal question. Too often, promised returns don’t
arrive as soon as management and other stake-
holders want them. Too often, synergies don’t
appear, with as many as four in five mergers or
acquisitions not providing the return on invest-
ment shareholders expected.
How to best assure looked-for returns?
Executing the steps in the deal-making process—
financial due diligence, term-sheet and contracts,
review of intellectual assets, debt and equity
financing, retention plans for key individuals—
all these are important things to do right. The
same goes for the work post-merger: rational-
izing market offerings, combining departments
and eliminating redundancies, cost-cutting and
improving business processes.
But deal-making and post-merger combina-
tions aren’t strategic unless those making the
deal know what their objectives are, and how to
achieve them. Executives involved in decision-
making on key corporate acquisitions need to
ask not “Are we doing things right?” but instead
“Are we doing the right things?”
Equally important as where to focus is speed
in decision-making and execution. By neces-
sity, mergers and acquisitions happen in a com-
pressed time-frame. In the high-velocity circum-
stances of a strategic transaction, it’s all the more
important to be mindful of not only getting the
deal done, but identifying, protecting and nurtur-
ing the strategic assets of the acquired entity.
Corporate finance professionals need a differ-
ent model for how to successfully effect business
strategy in dynamically shifting markets. They
need a strategic model that can address the trans-
formation and convergence of industries that are
increasingly being driven by fast-evolving tech-
nological innovation.
We propose that examining and developing
the dynamic capabilities of organizations are vital
to realizing success in strategic business combi-
nations. We forward alongside it a strategic map-
ping process that allows organizations involved
in acquisitions or mergers to ask the right ques-
tions in advance, and to enter business combi-
nations with a clear sense not only of financial
metrics but also market and business drivers that
can improve returns on investment.
For our definition of dynamic capabilities, we
rely on the seminal work of strategic business
management theorists who distinguish between
the traditional industrial markets which spurred
development of the widely accepted competitive
strategy model and a model that instead focuses
on how to optimize business opportunities in
rapidly evolving innovative markets—one we
believe more vital in today’s environment.
3
the M&A journal
Strategic Success
Closing the Deal Isn’t a
Strategy
Todd Antonelli – Managing Director, Strategy, Berkeley Research Group, LLC
Paul Feiler – Managing Director, Strategy, Berkeley Research Group, LLC
Todd Antonelli
Berkeley Research
Group, LLC
Paul Feiler
Berkeley Research
Group, LLC

4. The M&A journal
4
Understanding the Challenge: The Radical
Shift in Market Drivers
A traditional paradigm for corporate acqui-
sitions suggests that business combinations
enhance enterprise value by consolidating indus-
try sectors—increasing market share while elimi-
nating competition, and allowing cost-savings
through synergies and a concomitant reduction
in redundant operations.
Traditional models of corporate strategy, such
as those of Michael Porter and later of propo-
nents of game theory, focus on how companies
can dominate their markets against competitors.
However, this model is based on a historical
understanding of what drives value in traditional
and relatively static industries (Teece, Pisano and
Shuen 1997).
Neither of these is entirely wrong. But corpo-
rate value is today driven less by the dynamics
of 20th-century industrial success and more by
technological innovation, entrepreneurial and
opportunistic marketing, and even digital strat-
egy. Business models based on legacy industries
are less adequate to explaining where enterprise
largely inheres: in opportunities that emerge in
markets being transformed by disruptive techno-
logical change.
This analogy cannot be lost on strategic buy-
ers. The dynamics of deals suggest that they not
only understand what assets they stand to gain
in effecting the merger, but what intangible and
valuable clusters of abilities allow them to adapt
to dynamically changing external conditions,
even as the organization itself is evolving at high
velocity.
This suggests that a program for effective busi-
ness integration post-merger be based more on
being aware of the prevailing conditions of inter-
nal and external change, and building the ability
to identify opportunities and execute initiatives
in fluid, complex, constantly evolving markets.
Consolidation: Making Virtue of Necessity
To understand the challenges represented by
radical, fast-moving change, one need look no
further than the telecommunications, media and
entertainment industry—where consolidation is
driven by the convergence of traditional com-
munications services, content delivery platforms
and media, and content originators.
Technology has been particularly disruptive
in these sectors, uncoupling consumers from
legacy content, communications, and technology
providers. Consumers can now choose what con-
tent they want, on the device they want. As they
experience choice and have access to new prod-
ucts, they in turn expect more from providers of
products and services. Both telecommunications
and content delivery companies react by recon-
figuring their business models to meet custom-
ers’ evolving expectations.
Case in point? About 2.6 million U. S. house-
holds are now broadband only: neither subscrib-
ing to cable or picking up a broadcast signal.
(Nielsen, Total Audience Report, Dec. 2014) That
figure comprises 2.8% of total households in
the US, and is more than double the percent-
age (1.1%) from the previous year. Doubtless all
these former cable consumers are happy to forgo
the average monthly rate of $62 for cable—or an
average of $1.9 billion per year of cable revenue
lost to streaming consumers. But what are cable
providers to do?
Said differently, it is a $70+ billion question—
to unplug or not to unplug. And it’s triggering
a wave of consolidation. ATT acquires DirecTV.
Charter acquires Time Warner Cable. France’s
Altice—which like AT&T offers a quad-play busi-
ness model: television, cable Internet, and wire-
line and wireless telecommunications—recently
bid for New York-based Cablevision, which faces
aging infrastructure and waning attractiveness to
consumers who are being wooed by choice and
personalization. All are seeking to increase cus-
tomer bases, provide a greater range of content
choices, and convince consumers not to unplug.
Will it work? That remains to be seen, for inno-
vation in the sector is also seeding an industry-
changing value proposition for the emerging
ecosystem of smart TVs and related devices, such
as Apple TV and Roku, along with streaming
services from Amazon, Hulu, Netflix and now
YouTube. Who would have guessed ten years ago
that both Amazon and Netflix would be develop-
ing original program for digital media? Even just
five years ago, or three?
It’s a familiar Digital Age story: entrepreneur-
ial companies exploit avenues to disseminate
content, find audiences, and sell targeted adver-
tising. Technological innovation lowers the bar-
rier to market entry; entrepreneurs with new
products and services disrupt industries and
woo consumers; consumers vote with their feet;
and legacy service providers are forced to adapt.
Established organizations need to evolve—or
they become their own worst enemy.
Strategy: The Missing Piece?
It seems ironic to be suggesting a strategy
for undertaking a merger transaction. Mergers
Strategic Success
continued

5. 5
the M&A journal
manifestly deal with corporate-level strategy in
markets a company is in or has chosen to enter.
Other reasons management may embark on a
merger include securing valuable intellectual
assets, adding customer and/or key contractor
relationships, and proprietary or market-leading
business processes.
All these are factors in decision-making when
contemplating a merger. Surprisingly, however,
the discrete value proposition for a merger is often
not defined in advance of an acquisition beyond
the oft-repeated truisms market share, top-line rev-
enue, synergy, and cost-savings through realizing effi-
ciencies. But too often the post-combination busi-
ness-level strategies put in place by the acquirer
focus solely on integrating functional capabilities,
eliminating those that are redundant and empha-
sizing those that are potentially value-added.
Might this be where merger strategy routinely
fails? After all, a poorly articulated post-combi-
nation strategy is the principal reason mergers
fail to achieve their expected value. In two suc-
cessive books, The Strategy-Focused Organization
(2001) and Strategy Maps (2004), Harvard
Business School professors Robert Kaplan and
David Norton cite a litany of studies conducted
over a two-decade period that describe the fail-
ure of leaders to execute strategy. They conclude
that during the 1980s and 1990s, the failure rate of
corporate strategies was between 70% and 90%.
In an article in Harvard Business Review,
“Almost Ready: How Leaders Move Up,” Dan
Ciampa (2005) notes that the major cause of exec-
utive failure is the inability to execute strategy.
Successfully integrating two businesses is all
about strategy execution, yet the study to which
Chiampa alludes, from the Center of Creative
Leadership, found that 40% of new CEOs were
terminated in fewer than 18 months. Another
20% were considered ineffective but were toler-
ated by their boards.
Global strategy consultancy Bain & Co. stud-
ied the performance of companies with revenues
greater than $500 million, in seven developed
countries. During the best ten years ever in eco-
nomic history (1988–1998), Bain concluded that
fewer than ten percent of these large companies
achieved their strategic objectives, and only one
in eight came within 33% of their growth targets.
And the problem of ineffective strategy persists.
In The Trouble with Strategy (2012), Kim Warren
claims that the recent recession can be attributed
to the failure of strategies applied by private
enterprises, not just to consumer behavior or
government policies.
What accounts for this decades-long track
record of strategic underperformance? One rea-
son may be the lack of a comprehensive and
systemic strategic framework—a grand unified
theory, if you will—for effective strategic man-
agement after a merger that goes beyond finan-
cial metrics and efforts to streamline functions
and realize efficiencies.
Such a unified theory is not readily apparent.
Instead of there being a single generally accepted
way to do strategy, CEOs looking for help in
developing and articulating a strategy face a
plethora of choices, some substantially verifiable
concepts in practice and others little more than
buzzwords or catch-phrases that have gained
mind-share from popular business literature.
In the former category are concepts like com-
petitive strategy, process reengineering, total
quality management, enterprise resource plan-
ning, and IT program management; in the latter
arise such phrases as “passion for excellence,”
“the wisdom of teams,” and “blue ocean strat-
egy,” inspiring phrases that in fairness to their
originators are compelling and possibly useful,
but in no way amount to a normative strategy on
which to pin a complex organization’s future.
There are others: customer relationship man-
agement, product development, shareholder
value creation, best practices, core competencies,
organizational design, and leadership develop-
ment. But all these doctrines or concepts, how-
ever potentially valuable, are focused on different
functional or business-line achievements, each
suggesting its own metrics. Each offers insights
and prompts internal initiatives, but none pro-
vides a comprehensive integrative framework.
None addresses the necessity for organiza-
tions to develop and cultivate the ability to act
dynamically in rapidly evolving markets, where
an explicit formal strategy will not work as well
as being able to react to emerging opportunities,
engage the organization’s dynamic capabilities, and
realize value in complex, unpredictable markets.
Executives need a framework that allows the
organization to execute the right types of deals,
describing the context of an acquisition, why it
is necessary, and what is its looked-for outcome.
They need to communicate the strategy through-
out the organization and align important parts of
the organization to achieve it.
Dynamic Markets Demand Dynamic
Capabilities
In an innovation-driven economy such as
the present—germinated in Silicon Valley in the
1970s and now grown to encompass the global
innovation ecosystem—organizations need the
capability to adapt in dynamically changing mar-
Strategic Success

6. The M&A journal
6
kets. They need dynamic capabilities.
Apple, the poster child for market disruption,
didn’t simply create new products. It revolution-
ized entire product categories, essentially invent-
ing the concept of personal computing, creating
a channel for choosing (and paying for) one’s
music online, creating the smartphone, and after
its failed effort with the Newton personal digital
assistant in the mid-1990s, succeeding well over a
decade later with tablets able to run applications
that help individuals manage and improve their
personal lives.
It is hard to ignore the success of Apple in
virtually any context. It’s also not unimportant to
consider the failures from which it learned: One
way in which the company appears categorically
more successful even than some of its contem-
poraries—Alphabet, Facebook, Microsoft, and
Amazon—is the Cupertino company’s ability to
commit teams to the development of ideas, but in
highly focused, entrepreneurial efforts that bear
fruit with appealing, highly functional, and high-
quality personal technology devices.
iPhone, iPad, Apple Watch, now Apple TV. As
the game changes, Apple changes the game.
Apple is joined by other innovators creat-
ing new channels. Facebook connects a global
audience that shares information in real time.
Amazon and Alibaba are shaping commerce
and their related supply chains in ways that will
change industry long-term. Tesla—yes, a car
company—is fundamentally a technology inno-
vator in software and battery technology. Even
GE is publicly stating it is transforming itself into
a software company.
In many respects, the enemy to beat isn’t the
competitor anymore. The new enemy for the
legacy enterprise is itself: a company that can no
longer provide what the customer wants. The
advent of the Digital Age is challenging the via-
bility of consolidation strategies in every indus-
try, not just in the telecommunications, media
and entertainment sectors.
For organizations considering acquisitions,
the digital revolution demands that management
and the advisors that support them be strategic
not only in identifying targets but in managing
the integrated organization after the close. After
all, in a study by global accountancy KPMG as
recently as 2010, fully 80% of mergers fail to
realize expected value post-combination. Other
studies show slightly more promising percent-
ages—but acknowledge that half of all mergers
fail. With percentages like these, organizations
might as well simply flip a coin to determine
whether deals will drive value or not.
It is important, then, to challenge the cur-
rently accepted metrics of success on mergers
and acquisitions. In the past, these have focused
primarily on realizing synergy, product exten-
sion, and market expansion. We propose replac-
ing these with a clearer focus on the dynamic
capabilities that underpin success for acquirers.
When implemented correctly during a business
combination, strategic management addresses
all the areas necessary to guide the integration of
two hitherto discrete organizations and sets the
direction for a newly combined entity’s success.
Making Deals Work: Dynamic Capabilities
Formulated in the late 1980s by academics at
the Hass School of Business at the University of
California at Berkeley and the Harvard Business
School, the framing business management strat-
egy of dynamic capabilities emerged during a
period of aggressive innovation: the digital revo-
lution as it was playing out in Silicon Valley and
beyond, at a time of unprecedented technological
advances and similarly fast-moving entrepre-
neurial companies. Its fundamental premise was
the insufficiency of then-dominant models to
adjust to rapidly evolving market opportunities.
As that thinking has since evolved, a dynamic
capability has come to be defined as an orches-
trated and coordinated cluster of activities that is
essential for doing the right things. In his seminal
article and in many subsequent publications, stra-
tegic management expert David Teece identifies
as dynamic capabilities the organizational and
strategic routines that join ordinary capabilities—
foundational competencies and best practices
in those competencies – into a cause-and-effect
chain, a configuration, which effectively empowers
the organization to realize its strategic vision.
As a management theory, therefore, the princi-
ple of building dynamic capabilities emphasizes
the key role of strategic management in appro-
priately adapting, integrating, and reconfigur-
ing internal and external organizational skills,
best practices, processes, resources, and func-
tional competences to match the requirements of
a changing environment. Teece further describes
these as strategic configurations and super-pro-
cesses on which an organization can rely to adapt
to rapidly evolving circumstances.
As noted earlier, mergers and acquisitions
typically are planned and executed in short time-
frames. In the context of a transaction, dynamic
capabilities describes the clusters of activities
essential for management to deliver the looked-
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7. 7
the M&A journal
for value proposed by the business post-combi-
nation. Emphasizing and implementing the com-
bined entity strategy at the outset of planning
is the means to realizing that value. It suggests
such a strategy be explicit from the outset of plan-
ning a transaction, discussed and incorporated
during due diligence and deliverd upon post-
combination.
There are three distinct contexts in which the
concept of dynamic capabilities plays a role dur-
ing the transaction life-cycle. These can be char-
acterized as sensing, shaping, and seizing.
Sensing describes the super-process from mar-
ket research and analysis to SWOT analysis and
development to target identification; and will,
once a target is in the transaction pipeline, include
a review of the five forces for identifying competi-
tive opportunities (Porter 1990) along with analy-
sis of competitors and assessing where competi-
tive intensity is low. This process includes under-
standing the characteristics of target consumers
and where ideal customers are located in these
geographic pockets of low competitive intensity,
allowing the acquirer to define a value proposi-
tion that the merger strategy can capture.
Shaping, which occurs largely after the deal
is closed and even begins after the signing of a
letter of intent, includes identifying how other
opportunities surfaced during due diligence
might best be realized, along with managing any
issues and concerns that arise during the due
diligence period; and, after the transaction closes,
involves aligning the organization and its distinct
combined capability and spinning off or elimi-
nating redundant ones).
Seizing, of course, means acting on the oppor-
tunities. Making the “right” decisions to capture
the extraordinary value opportunities; reallocat-
ing both financial and human capital and operat-
ing strategic business models focused on satisfy-
ing customers and capturing value.
Strategy Mapping: A Systemic Strategic
Framework
As a potential normative model for managing
any entity—including a newly combined one—
the reader can be expected to ask how best does
a CEO and the board usefully engage the concept
of dynamic capabilities before, during, and after
a transaction.
One useful rubric is strategy mapping, a holistic,
systemic strategic framework capable of describ-
ing how an organization intends to create value
for its shareholders, customers and employ-
ees, developed at Harvard Business School by
Kaplan and Norton (2004). Used extensively as
a management tool in business and industry,
government, and nonprofit organizations world-
wide, strategy mapping aligns business activities
with the vision and strategy of the organization;
guides mergers, acquisitions, and divestitures;
improves internal and external communications;
and allows organizations to monitor performance
against strategic goals.
After opportunities and threats have been
identified and the direction or vision has been set,
the strategy map shows at a glance and on one
page how an organization links the key value-
creating activities in cause-and-effect chains for
the proposed transaction. Together these process
or capability chains tell in advance the story of
how the firm will achieve its strategic vision—
the firm’s path to success. [See Figure 1: Strategic
Mapping, Page 8]
In the context of a merger, acquisition or
divesture, Kaplan & Norton’s strategy mapping
process organizes strategy execution by asking
key questions from four business perspectives,
each in turn informing its successor. In order,
those four perspectives are financial, customers,
internal processes, and learning and growth. The
financial perspective is the principal one for a
profit-oriented organization, though the ques-
tions each prompts management to ask flow from
the bottom up. But the framework clearly starts
the cause-and-effect chain with the learning
and growth of intangible assets, such as people,
knowledge and processes, and only ends with
financial outcomes, such as productivity and
growth that drive total shareholder return and
expected economic value creation.
To illustrate the concept, one would follow the
map shown in Figure 1 from the bottom up. The
objectives set in the learning and growth perspec-
tive ensure that an organization will excel at the
internal processes, which in turn are essential to
achieving the customer value proposition. Once
identified, this value proposition feeds the finan-
cial results: increased growth and profitability.
Strategic objectives at each level linked to objec-
tives set at the levels above and below.
Following Kaplan and Norton, for profit-max-
imizing companies the financial perspective is the
ultimate objective of the strategy. In its simplest
form, it has only two objectives: growth, selling
new and/or more products or services to current
or new customers, and productivity, reducing costs
and/or finding ways to operate more efficiently.
From the perspective on financial objectives,
therefore, the key question is “If we accomplish
our strategy, if we do all that we need to do, how we
will look to our shareholders?” Once that question
is answered, two others follow: “What are the
Strategic Success

8. The M&A journal
8
clearly defined targets, metrics, and accountabil-
ity to achieve growth and cost reduction syner-
gies?” and, “What does our integration manage-
ment approach need to be, to ensure synergies
are aggressively pursued from Day 1 and are
realized in a timely way?
From a perspective on the customer, the impor-
tant question is “To achieve our stated financial
objectives, which customers do we want—and
how will we have to be perceived by our custom-
ers to earn and retain their business?” From these
questions follow others, including:
• What are the clear points of customer con-
tact?
• How do we ensure attention and support
are uninterrupted?
• How do we identify and sustain partner
and channel relationships?
• How do we ensure our customer value
propositions and product roadmaps are
clearly communicated and understood?
• How do we ensure we have a clear brand-
ing strategy?
Everything the organization aspires to achieve
financially depends on the impact its products or
services have on its customers, and the experi-
ence it creates for them.
Customers buy for three reasons: value proposi-
tion, relationship, and brand. The value proposition
comprises whether and how the attributes of
your product or service meet customers’ needs,
in terms of price, quality, innovation, availability,
selection or functionality. Relationships amplify
the value proposition by incorporating the qual-
ity of service to customers, including their experi-
ence of the brand at its multiple touch points, and
the strength of bonds forged through personal
relationships. Together, these two contribute to
the third: the overall perception of customers
of a company brand. Becoming a market-leader
means customers have achieved a comfort level
with the brand that extends to the overall appeal
of its product and service mix. (Again, it is hard
not to think of Apple when seeking to describe
the quality of the relationship customers have
with a company’s products and services and the
brand.)
Third is the internal perspective, where execu-
tive management’s key questions should include
“At which processes must we excel, in order
to achieve our customer value proposition?”
and “How do we ensure appropriate plans are
Strategic Success
continued
How Does Your Organization Create Value?
Financial
Perspective
Customer
Perspective
Internal
Perspective
Intangibles:
Learning
And Growth
Perspective
Productivity Strategy Growth StrategyLong-Term
Shareholder Value
Improve Cost
Structure
Increase Asset
Utilization
Expand Revenue
Opportunities
Enhance Customer
Value
Customer Value Proposition
Who are the Customers we want and how will we have to be perceived by them to get and retain their business?
Product/Service Attributes Relationship Image
Price Quality FunctionalitySelectionAvailability Service BrandPartnership
Operations Management
Processes
Customer Management
Processes
Innovation/Product Dev.
Processes
Ecosystem
Processes
§ Supply
§ Production
§ Distribution
§ Risk Management
§ Selection
§ Acquisition
§ Retention
§ Growth
§ Opportunity ID
§ R&D Portfolio
§ Design/Develop
§ Launch
§ Partnering
§ Legal & Regulatory
§ Financial Institutions
§ HSSE
Human Capital
Information Capital
Organizational Capital
Culture Leadership Alignment Teamwork
If we succeed, how will
we look to our
shareholders?
At what internal processes must we excel to satisfy our customers?
To excel at these processes, what must our organization learn and how must we improve?
Capacity Technical Competence Deployment Incentives
Knowledge Management IP IT Infrastructure
Adapted from Kaplan & Norton (2004), p.11

9. 9
the M&A journal
in place for all businesses, functions and loca-
tions on Day 1?” Certainly to keep the prom-
ise with one’s customers, an organization must
excel at certain internal processes, many could
be described at this level of the strategic map. As
examples, we offer four:
• Operational processes that ensure that you
can deliver what the customer wants and
you can do this profitably.
• Marketing and sales processes that ensure that
you get and keep the customers you want,
in the segments and markets you want.
• Processes that promote innovation, to ensure
that your products and services remain rel-
evant and product development processes
that speed the velocity of new products to
market.
• Ecosystem processes such as creating strategic
partnerships, ensuring regulatory and legal
compliance, social responsibility processes,
and building trust with financial institu-
tions (Teece, 2012).
Last is the body of strategically aligned intan-
gible assets that allow organizations to excel at
these processes, what we call the learning and
growth perspective. Here the key question is: “In
order to excel at the internal processes that sup-
port our customer value proposition, how must
we grow and what must we learn?” From that
question arise these others:
• What will be the composition of the gov-
ernance team and the optimal post-combi-
nation organization structure? Do we have
clearly defined line-management roles?
• Do we have a communication, change, and
cultural integration plan that allows us to
reach all stakeholders with accurate, clear,
concise and compelling messages about the
reasons for and value of the transaction?
• Have key employees been identified; are
morale issues being addressed; and are
incentives in place where appropriate?
• How do we ensure our organization acts
quickly and decisively?
Following Kaplan and Norton, the strategy
map divides intangible assets into three catego-
ries. The first, human capital, ensures that the firm
has the right number of people with the required
technical skills to excel at vital processes, and
that these resources are strategically deployed to
capture opportunities with the highest potential
economic value. The second, knowledge and infor-
mation capital, develops, protects and deploys
the firm’s intellectual property, and ensures that
the firm’s IT systems, networks and infrastruc-
ture support the strategy. Third is organizational
capital, which ensures that through its culture,
leadership, teamwork and alignment systems,
the organization can sustain the changes needed
to execute the strategy.
Thus does the strategy mapping process show
how chains of dynamic capabilities start with the
learning and growth of intangible assets, such as
people, knowledge and processes, and end with
financial outcomes, such as productivity and
growth that drive total shareholder return and
expected economic value creation.
Strategy Mapping and Dynamic Capabilities
During the post-combination strategy devel-
opment process, objectives are developed at each
level of the strategy map to create best practices
or core competencies around activities that are
essential to achieving the strategy. These foun-
dational elements might include, for example,
competencies related to developing A+ technical
and nontechnical skills, a global IT infrastructure,
an innovative R+D team, an effective recruiting
process, a product development process, or a
strong sales team. This foundational step, creat-
ing best practices and competency in key areas of
the company, is only the beginning of transform-
ing an organization into one that can realize the
strategy’s vision of the combined firms.
But strategy mapping does not in and of itself
constitute a complete framework. It helps organi-
zations create the building blocks, then the links
in the chain must be joined into stratégique rou-
tines or super-processes that are essential to cre-
ating value. It’s one thing to have a best practice
around recruiting or training—an ordinary capabil-
ity. It’s another to have the right people doing the
right things, in the right place and with the right
people, at the right time—a dynamic capability.
One of the criticisms of the strategy mapping
process is that, as it has often been applied in
organizations that are developing strategy, causal
links between perspectives are not sufficiently
articulated to make them useful for “opera-
tionalizing” the strategy. We believe that the
importance of this crucial step is emphasized and
elucidated through the concepts of “Dynamic
Capabilities.”
In some organizations, the chain of founda-
tional capabilities may create an identifiable,
specific process or a strategic routine (Eisenhardt
& Martin, 2000, pp. 1107-1108). In others, particu-
larly in high-velocity markets, ongoing strategic
management is essential because the dynamic
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10. The M&A journal
10
capability required to capture an opportunity
may require a leader to quickly orchestrate a
unique configuration of processes or founda-
tional capabilities for a particular time and pur-
pose and then dissolve it when it loses relevance
(Teece, 2012b, p. 1398).
Dynamic capabilities are therefore “meta-com-
petencies” that orchestrate operational compe-
tencies (Teece, 1986, 2006, 2007, 2012b). A leader’s
management of the strategy processes is semi-
continuous, and decreases or increases with the
velocity of the market or the velocity of the busi-
ness situation, such as in a merger or acquisition.
To summarize, leaders cannot get what they want
if they fail to manage dynamic capabilities; they
cannot achieve supernormal profits (or gain free
cash flow) without orchestrating the dynamic
capabilities unique to the firm’s competitive
advantage.
Here’s a simple example of the chain of cause-
and-effect linkages along one strategic theme:
“growth through increased sales post-acquisi-
tion.” To realize this value proposition, you might
begin by gauging the strength of your newly
combined research and development processes,
then deciding how to improve that R&D, and
training your people in lean management and
Six Sigma techniques. Doing so can improve the
quality of design and manufacturing processes,
which in turn improves the functionality of your
product and the speed at which new products
come to market. Correspondingly, a marketing
campaign focused on innovation and product
reliability can be expected to improve customer
satisfaction and long-term customer loyalty,
which leads to increased sales. From the Kaplan
and Norton’s four perspectives on the strategic
map, the organization identifies the chain of
cause-and-effect objectives, its dynamic capa-
bilities, which must be achieved for the growth
strategy to be executed and value to be realized.
Conclusion
To be successful in today’s complex markets,
parties involved in a business combination must
look beyond realizing greater market share, addi-
tional revenues, and higher profits in existing
product lines. Management must look beyond
anticipated synergies and cost-savings. It must
even look past the rationalization of an intel-
lectual asset portfolio or the ability to grow the
talent base of the organization.
None of these objectives is to be disregarded
but today’s CEOs must have a clear vision for
how merged organizations’ collective capabili-
ties allow a combined entity to adjust to and
exploit markets it may not even yet know exist.
Management needs to focus on how the orga-
nization can embed the principles of sensing,
through target identification and the diligent
transactional due diligence, the attractive and
valuable dynamic capabilities that will allow it to
best take advantage of opportunities; shaping the
business by prioritizing and implementing those
capabilities; and seizing the underlying expected
deal value.
This concept also proposes to alter fundamen-
tal assumptions about the role and skills needed
from the organization’s third-party advisors: the
lawyers, investment bankers, accountants, and
other strategic advisors who are at the tip of the
spear on deal review, long before a letter of intent
is crafted and negotiations begin. These advisors
need to assist management in leading these three
key activities, and, in turn, may want themselves
to understand and appreciate how the need for
dynamic capabilities makes them more valuable
to their clients, during the deal-making period
and beyond it.
Todd Antonelli is a Managing Director and
co-leader of the Strategy Practice at Berkeley
Research Group. Todd has over 30 years experi-
ence in strategy and large scale transformation
engagements. He also has extensive experience
advising investors, boards and their top leader-
ship teams on strategic business combination
engagements including: complex merger, acqui-
sition, divestiture, joint venture / strategic alli-
ance, business restructuring, spin - out, initial
public offering, and privatization work. In over
60 strategic business combination projects each
exceeding more than $1 billion in market value,
Todd has offered multifaceted advice from tar-
get identification to transaction due diligence to
transition assistance to transformation execution
for companies in the manufacturing, automo-
tive, high technology, aerospace and defense,
consumer products, insurance, financial ser-
vices, pharmaceutical, energy, and steel indus-
tries and at locations in North America, Europe,
and Asia. Todd earned his M.B.A. from New
York University, Leonard N. Stern School of
Business, New York City, NY - M.B.A. Finance,
1989 and his B.S. in Industrial Engineering at
the University of Illinois, Champaign, IL - B.S.
Industrial Engineering, 1983.
Dr. Paul Feiler is a Managing Director and
co-leader of the Strategy Practice at Berkeley
Strategic Success
continued

11. 11
the M&A journal
Research Group and provides expert advisory
services related to the design and development of
strategy and implementation of transformational
change with large organizations. Dr. Feiler offers
over 25 years of professional experience leading
strategy development and major change projects
in energy, healthcare, construction, manufactur-
ing, and higher education industries, and with
government institutions. He focuses on helping
leaders realize long-term, sustained growth in
shareholder value through practical, system-
atic, and organized approaches that produce
outstanding business results, create a winning
culture, inspire and align followers, and build
momentum to realize strategic vision. Dr. Feiler’s
engagements have involved developing and
resetting strategy, strategy execution and imple-
mentation, global change projects, capability
improvement, strategic risk management, and
metrics and measurement systems. Paul earned
his Ph.D. from Princeton University, graduated
from the Harvard Business School Leadership
program, received a M.S. in Psychology from
University of Houston, Clear Lake and his B.A
from Wheaton College.
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MA

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Mr. Flynn: Restaurant industry observers have
often thought that restaurant M&A is a leading
indicator of the overall U.S. economy. Individual
purchasers visit restaurants when the economy
is starting to feel good, and when the economy is
starting to feel bad, they don’t go to restaurants.
So you can look at restaurant M&A as a sign of
how the economy is performing. Things were
doing great in the U.S. economy in ’07. You can
see how the graph [Chart 1, page 17] shows that
restaurant M&A really deteriorated in ’08 and ’09
and ’10 and then started to pick up again. We are
now at an all-time high with an average multiple
at 11x. That’s incredible.
Mr.Chandik: I would just add that this is as
busy as we’ve seen the M&A market. We’re for-
tunate enough to be involved in a number of
transactions—four to five per year. We’ve seen a
significant uptick in terms of both activity level
and also in terms of overall valuation, as you can
see from the chart. Definitely at all-time highs.
The real question is what does that mean? What
does the future look like? Is there an opportunity
to go up? Will it go flat, or go down? Obviously, I
don’t have a crystal ball but it does feel like this is
the best case scenario, where we are today. We are
starting to see some cracks in various markets, so
I would say that the most likely outcome is hope-
fully to stay at this level for a while longer. It’s
very difficult to time the peaks and valleys but
it’s hard to see it going much higher than where
it is today.
Mr. Sullivan: It’s also interesting, given that
the high valuations we’ve seen, whether they can
hold, and if those valuations hold, whether the
deterioration in the market we might see is actu-
ally in the number of deals done at the high valu-
ations, or whether the valuations fall and the deal
flow is sustained. That will be a very interesting
question as interest rates rise, which we believe
the Fed will eventually do, and the financing
sources become comparatively more expensive.
Mr. Flynn: Let’s go over the capital markets
side. Damon, looking at this slide, what’s your
assessment of the current state of the equity capi-
tal markets.
Mr. Chandik: Going off of what Sean said,
there is clearly an inter-relationship between the
various markets. We’ve talked about the M&A
markets being at all-time highs. Part of that is
related to both the debt and the equity markets,
so if you look at this chart here on [Chart 2, page
18] which talks about restaurant IPOs, if you
look at the period from 2009 to 2012, you actu-
ally had more restaurants leaving the public
arena. You had ten restaurant chains that were
effectively acquired or taken private versus six
new entrants. So the total number shrank from
54 to 50. And then what we’ve seen from 2012
is a reversal of that trend. The number acquired
or taken private were only 5, versus new IPOs
which you can see down on the bottom right of
[Chart 2, page 18]. That has translated into the
other markets as well.
Mr. Flynn: Why don’t we turn to one of the
leading reasons for the changes in this industry—
the emergence of the fast casual sector within
the restaurant industry. This has really been a
factor within the sector. I would say within the
last ten years it has really emerged. I don’t think
anybody would say that the industry as a whole
Hot Off the Grill
A Seminar on Restaurant M&A
Michael Flynn: Gibson Dunn
Damon Chandik: Piper Jaffray
Sean Sullivan: Gibson Dunn
Michael Gottlieb: Ernst & Young

13. 13
the M&A journal
has grown, but rather that the fast casual has can-
nibalized other sectors of the industry.
[Chart 3, page 18]
Mr. Sullivan: I think that the most interest-
ing customer data and polls that we’ve seen of
customers have suggested that this preference
for fast casual is not specific to any age or income
level. It is a focus on convenience that reaches
across a number of demographics of age, income
and geographic location, both urban and sub-
urban areas. And then of course, it specifically
reflects a millennial preference for value, con-
venience and other factors that we’ll talk about
a little bit later. Those factors on a macro level
suggest that not only is there a premium for fast
casual, but the growth of fast casual is likely to
continue.
Mr. Flynn: Damon, as it relates to the high
capital equity market multiples, and consider-
ing the M&A market where a financial buyer is
looking to leverage their investment in a restau-
rant company, has that had a significant impact,
because a financial buyer is not able to leverage
as much. I would think that that maybe slowed
down the M&A market a little bit, maybe not
with these smaller deals, but perhaps with larger
deals?
Mr. Chandik: That’s a great point Mike. I think
historically when you were looking at these deals,
there was a significant amount of debt used in
the overall acquisition. In today’s market, given
the multiples, it’s requiring a higher equity check.
So, effectively cash from the buyer, relative to
funds borrowed from a bank. So that is definitely
impacting what we call a more traditional buy-
out group to do deals. I think what we’ve seen,
though, is these buyers getting more aggressive
and being willing to put more of their own capital
to work, more of their own capital at risk, for these
types of deals. We’re seeing, with the strength of
the IPO markets and the equity markets, we’re
seeing companies that historically might have
been sold to a private equity group, or received an
investment from a private equity group, instead
go straight to the public markets. Take a company
like The Habit, which we took public. That was a
company that historically would have received
investment from a private equity firm prior to
going public, just given its size. But now, we’re
seeing companies with less than $20 million of
cash flow go public, which would have been vir-
tually unheard of just a couple of years ago.
We’re also certainly seeing an increase in what
we call minority investments—private equity
firms making investments in companies but tak-
ing a minority position. The important thing to
note, given the structure of the vast majority of
these firms, is that they have a fund life. It could
be seven to ten years, which means they have to
get out at some point in time. And so, generally
speaking, there needs to be some mechanism for
them to get out of their investment. That could
be a put right, which basically would say, you
have to buy my stake back in X number of years.
So there are structural considerations, but we
are certainly seeing an increase in the number of
minority deals in the market today.
Mr. Flynn: We’re now going to move over to
our friends at the SEC. Sean Sullivan, would you
like to comment on this.
Mr. Sullivan: And just to be clear, I’m not at
the SEC, just in case anyone thought I was one
of the friends at the SEC, but I do enjoy reading
their comment letters when they come for my
clients and for other clients. We took a look at
comment letters that had been received in the
IPO context over the last five years for restaurant
industry participants. And, while the comments
are always wide-ranging and fact-specific, there
are a few noticeable trends that come from that,
and we want to talk a little bit about them today.
First, the SEC continues to have a focus on
the use of non-GAAP metrics. There has been
historical wariness of these figures by the SEC.
That has been somewhat moderated, particularly
in a 2010 release of disclosure interpretations,
which seemed to signal a turning point in the
SEC’s view on non-GAAP metrics, particularly
as they now see that there is a great usefulness
for investors who look at them and see that they
allow more apples-to-apples comparisons among
companies.
Focusing on what the SEC asks of registrants,
in comment letters the focused comments tend
to be on clearly defining the metric, making sure
that all of the assumptions and other inputs into
the metric are clearly defined. That’s important
when drafting. It’s important when deciding
what the calculations are going to be to reach
those metrics, such as what stores are going to
be included in the same-store sale calculation.
So making sure that that information is clearly
presented and used consistently is one source
of comments from the SEC and something that
can be, through careful drafting, avoided and
mitigated.
The SEC sometimes challenges whether costs
that it thinks should be excluded from a met-
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14. The M&A journal
14
ric like adjusted EBITDA are really non-recur-
ring. Professional and transactional services that
sometimes can be excluded can be challenged so
having a good explanation and back-up to pro-
vide to the SEC is important.
Another one would be opening expenses asso-
ciated with restaurants. There have been some
issuers who have attempted to exclude portions
of those. The SEC has often written back and
said, “Gee, these are cash charges that are of a
recurring nature even though your description
is that they are of a non-cash and non-recurring
nature.” It’s important for the reality of what’s
being excluded to match up with the theoretical
underpinnings. The SEC is very attuned to that
particular focus area.
It’s very important to have a very specific
and robust explanation of why these metrics are
useful to investors. That’s usually presented in
the MD&A and in the Summary and Selected
Financials. It is something that with good up-
front work can avoid or preclude a comment from
SEC. But it is something that does come up from
time to time. The other area to focus on is how the
measures match up with industry norms. When
the SEC senses that the metric is too far afield, it
does ask questions in many instances.
Additionally, another area of focus has been
dependence on a single supplier. There are many
situations where restaurants for some particular
item or food service rely on a single supplier.
The risk here that the SEC is focused on is what
happens if that supplier’s situation changes and
is there adequate disclosure of the present rela-
tionship and what would happen in the event
that that relationship was disrupted. Comments
in this area tend to focus on identification of the
supplier, which, of course, creates tension. There
may reasons for confidentiality. The issuer may
not wish to disclose a certain supplier. They’re
balancing that with the disclosure to allow an
investor to properly identify what risk might be
present from that single supplier, or even the
veracity and the investor’s preference for that
supplier of the particular good.
There is a potential that if a substantial depen-
dence on the contract is determined that the SEC
will insist on that agreement being filed. And
fundamentally, there is often a request for greater
disclosure about the relationship between the
company and the supplier. In a recent letter, there
was SEC comment focused on the rights to for-
mulas that were noted to be not in the compa-
ny’s possession and the company did not have a
license to those formulas. So the SEC pushes back
in areas like that and says, “Gee, what are the
concerns of investors with respect to what hap-
pens in the event that this particular supply rela-
tionship is disrupted. Are the formulas going to
change and what business risks flow from that?
The basic focus here continues to be on inves-
tor protection, which is of course one of the SEC’s
chief goals, as is understanding the connection
between these interesting and kind of unique
relationships with the greater business risk pro-
file and the greater business performance going
forward.
On the next page [Chart 6, page 18], another
area that we see a tremendous amount of com-
ments—in fact, almost every single restaurant
IPO gets comments—with respect to substan-
tiation of statements and data. It comes in two
flavors. It’s the removal or the substantiation of
marketing language—“unique market position,”
“powerful growth strategies”—and a focus on
specific claims that are made. Things like “We
use higher quality beef” and “Our staff provides
superior service.” Fundamentally, the SEC wants
to understand why a company is making these
claims and how it’s differentiating itself from
others, and to separate that those arguments
from the things that are purely marketing jargon.
It is not uncommon in comment letters for the
SEC to call out specific examples. Del Frisco’s
had 30 specific examples cited in a question; El
Pollo Loco had 20; Potbelly had 15. Noodles &
Company had 10.
The basic approach to fixing this is to either
amend the statement to be a statement of belief,
which has a different treatment and standard,
support the statement with evidence and discuss
it with the SEC, or simply revise the sentence to
consist of less marketing language. This of course
creates great tension because fundamentally, the
business section is a legal disclosure document.
But it is also an important statement of what the
company seeks to do and what its strategy is. So
balancing those tensions is absolutely essential
for the bankers, lawyers and auditors on the deal.
The flavor of the comments that come in tend
to relate to two topics: business statements—
statements like “compelling value proposition”
or “unique combination of product, people and
places”—statements of that nature often draw
the attention of the SEC. They can be challenging
to support. Usually, the tack with those is to try
to find those that are most important and support
them and draft them in a way that makes the SEC
comfortable while also preserving the strategy
and the features that make a restaurant truly
Restaurant M&A
continued

15. 15
the M&A journal
unique that should be out there for investors. The
other flavor is the food and service statement—
statements like “surprisingly friendly people
working for us;” “unique cooking processes,” or
“healthier and higher quality ingredients.” These
statements often draw an SEC comment that
says, “Higher quality than whom?” or “Healthier
than what?” In those cases, the approach by most
issuers is to decide on the ones that are really
important and supportable, and make revisions
in the language of most of the others to make
them more palatable.
The point of this is that it is fundamentally
a back-and-forth process that every restaurant
issuer faces. Just given the way in which restaura-
teurs describe their product is by its nature going
to come into conflict with the more straight-and-
narrow SEC disclosure that is typical of filings.
It’s also worth noting that many, many issuers
have fought the battle of calling their customers
“guests” in SEC filings. While that is certainly
common nomenclature in the industry, it is some-
thing that the SEC has fought pretty hard against
and held the line in a number of recent IPOs and
SEC filings.
Also, with respect to related party transac-
tions, another area of SEC focus, careful consid-
eration should be given to related party transac-
tions, specifically in the case of sponsor-backed
IPOs and Up-C transactions where we see a con-
tinuing influence of the sponsor or the prior own-
ers. It’s important for the issuer to understand
and fully describe those, not only related party
transactions that have occurred prior to the IPO
but also the continuing influence of the company
going forward. That is an area where there has
been a razor-sharp focus.
Mr. Flynn: Damon, let’s move to the con-
vergence of M&A and public offerings and talk
about dual tracking. For those of you that may
not be familiar with what the term dual track
means, it is basically when a company wants to
have an exit and decides to, at the same time,
pursue an M&A strategy and an IPO, using the
IPO as in essence a second buyer to compete with
a strategic or private equity buyer, all at the same
time, to create competition. The benefits of this
are maximizing exit proceeds, and theoretically
having a better chance of certainty and hedging
your bets. On the other hand, it’s much more
expensive. Basically, management has no time
to do anything but this. Running the business is
much more challenging. It’s a longer process, and
visibility issues are tricky because the IPO mar-
kets and windows come and go.
Mr. Chandik: If you look at [Chart 10, page 19],
there is kind of a continuum between doing a full
M&A process with no IPO consideration on the
left, and on the right, a full IPO process with
no interest in selling. There is a lot of different
flavors in between, depending on whether there
is a bias in one direction or the other. I think it’s
important to note a couple of things: one—it is a
significant time commitment and also monetary
commitment to undertake both. Each process on
its own is a full-time job and combining them
together creates a situation where we’re able to
use some of the materials, if not most of the mate-
rials together, but it just creates an additional
need for management’s time. So, it’s not some-
thing to be taken lightly. That said, it does pro-
vide the most optionality for the seller in terms
of whether or not they want to go public or sell
the business. It can also often result in true price
discovery on what is the highest price.
With the change in SEC rules, which effec-
tively allow companies to file privately—to start
the process earlier without getting the informa-
tion out there—this creates a situation where
buyers won’t necessarily know about a company
going public unless they’re contacted by a banker
or someone related to the company until effec-
tively 20-some odd days before the deal actually
prices. Historically, there would a several months
time frame from that initial filing and ultimate
pricing. What that allowed was that if there was
anyone out in the market that wanted to make an
offer, they had enough time to contact the com-
pany, contact the bankers, and get the process
rolling in that sense. In today’s market, you really
don’t have time, so if you want to be considering
both processes, then you need to be contacting
potential buyers ahead of that public filing.
Mr. Flynn: We’re going to move on now. We
mentioned earlier about non-GAAP metrics in
the industry. We talked about it from the perspec-
tive of the regulators and their concern about that
from an accounting standpoint. I’d like Damon
to talk about it now from the importance of the
investors and the analysts’ side and why these
things are so carefully watched. Damon?
Mr. Chandik: Sure. [Chart 12, page 19] gives
you a summary of some of the key financial met-
rics that investors are looking at. Same-store sales
is probably the one that gets the most attention.
That is a breakdown between traffic, price and
product mix, but really it is an easy metric for
investors to look at and compare companies. You
can see significant moves in stock price subse-
quent to reporting, but it’s also about the expecta-
Restaurant M&A

16. The M&A journal
16
tion on a go-forward basis. Clearly, that is a key
metric.
System-wide sales is much more relevant in
franchised concepts because that will take into
account the sales of the franchised businesses and
not just the revenue that would be from the roy-
alty rate paid to the company itself. But it does
get to the scale of the business and the market
acceptance or the ability to travel.
The next two—average unit volume and
cash-in-cash returns—those are really focused
on the metrics at the store level. So rather than
same-store sales, system-wide sales, or adjusted
EBITDA, which are consolidated company met-
rics, the average unit volume and the cash-on-
cash are really looking at the profitability and the
returns at the individual unit level. The reason
that’s important is it’s an indicator for the ability
to grow and help the business. If the newer stores
are not making money, it’s hard to see the com-
pany having a long life in front of it.
Then the last one is adjusted EBITDA—and I
would add net income to that as well. This is the
metric that investors are predominantly look-
ing at to value companies. These are the public
companies. I will say the difference between
the public and the private markets—private
markets, which would be an M&A market, they
tend to look at historical or current year EBITDA.
The public markets tend to look at projected
EBITDA. So that is two differences, two key dif-
ferences. Then really, the use of EBITDA—which
is a proxy for cash flow—as a key metric is a
relatively new phenomenon as well. Historically,
we’ve looked at net income or price-to-earnings,
or P/E ratio as the primary metric, but I would
say that more recently, with the influx of smaller
companies, which may have little net income,
we’ve certainly seen EBITDA become a driving
factor in valuation.
Mr. Flynn: Let’s move forward to the next
slide [Chart 13, page 19] —the power of milleni-
als. This is an area that in a variety of different
CFO panels that I moderate, my very last ques-
tion is generally to the CFO—What keeps you up
at night? In the last two or three years, I would
say the majority of the CFOs will say it’s the mil-
lennial generation, their buying habits and their
trends and how I can adopt and convert my res-
taurant concept to match that generation. So it is
very powerful—and that’s why we say the power
of the millenials. So with that, let’s go back to
Sean. Why don’t you give us the high-level view
from your perspective as a millennial of what
your generation is looking for.
Mr. Sullivan: Thanks, Mike. The [Chart 13,
page 19] has a number of statistics that talk about
millenials, but the takeaway on this generation
right now is it is a truly large juggernaut of a
generation with 87.2 million people in the U.S. It
is projected that up to 75 percent of the growth in
the restaurant industry will come from millenials
as they get ready to household-build and parent-
hood. For many of us, that is happening later
than it did in our parents’ generation. And that’s
the driver of why there is so much growth.
All of these statistics about the preference for
communal tables and eating foods that are certi-
fied organic come down to basically four values
that millenials have. They’re focused all upon
value. Many of us in the millennial generation
suffered through the Great Recession and were
searching for our first jobs during that period.
There is also a very high level of students in that
demographic. A focus on value is absolutely
essential to an understanding of millennial trends
and how they’ll shape the fast-casual and all the
segments of the restaurant market. A focus on
convenience—folks in their twenties and thir-
ties and at every age are focused on making the
most of their time as life becomes more compli-
cated. So convenience is the second value that
is focused on. A focus on freshness—that’s a
consciousness with respect to how meat is raised,
a focus on health. That focus on freshness really
emphasizes a number of the focuses of millenials,
which is why we see places like Chipotle really
play up that element of their strategy. And then
a focus on information—that’s transparency, an
informed decision-making processes, and a use
of the website of the restaurant to understand
exactly what the ingredients are and what the
history of the various components of the food
that’s eaten.
Then, on the next slide, [Chart 14, page 20]
we talk about a related but separate trend, which
is the focus on healthy options. Again, there are
number of statistics here, but the broader picture
is there is a rapid change. It’s really been just in
the past few years—a focus on healthy choices.
And there is a nuanced view of what is a healthy
choice. It is not simply a numerical computation.
A number of studies have shown that what used
to be a focus on calories and weight and BMI
has changed into a much more practical healthy
lifestyle measurement. So millenials and folks of
all ages and demographics are focused on how
they feel when they go to the gym or go running
Restaurant M&A
continued

17. 17
the M&A journal
or do yoga. They’re looking to feel good through-
out their lives and so there is a focus much more
on the practical elements of a healthy lifestyle.
You’ll see in the marketing campaigns of many
restaurants, they are seeking to fit into that, to
be a component of that healthy lifestyle, not just,
“Oh, we have a 90 calorie option for X that’s low
on carbohydrates.” So, again, buzzwords that we
see over again are “locally sourced,” “organic.”
The animal husbandry practices that are being
used are talked about at a number of fast-casual
restaurants, including antibiotic and hormone-
free options. Those are all important elements
that folks are willing to pay more for and that are
shaping the trend going forward.
With the focus on those two areas, we then
take up the question of what we see going for-
ward and Damon will kick that off.
Mr. Chandik: Thanks Sean. As stated earlier,
clearly I do not have a crystal ball or I would be
doing something totally different. But I think it
is important to note that there is an interrelation
between the markets, with the M&A market, the
IPO market and the debt market. They are all
interconnected. M&A is clearly impacted by the
ability to get debt and the cost of that debt. It’s
also impacted by the IPO market—these all tend
to be a proxies for future value. The IPO markets
are clearly impacted by the debt markets as well.
That impacts the profitability of the individual
companies, and also by the M&A markets Debt
is obviously in itself quite important, given the
ability to add leverage at a lower cost and drive
growth through investment.
So, when we look at the market, there is cer-
tainly a lot of questions out there, probably more
questions than answers. We’re certainly seeing
an increase in volatility of late. We’re looking
at the publicly traded restaurant companies.
The companies that are missing expectations—
and it’s important to note that it may not be
what the companies said, but what the investors
expected—missing those expectations can be
brutal. We’ve seen significant hits. With interest
rates near zero, it’s hard to see those going lower,
and the real question is when do they start to tick
up, and what will be the ultimate effect on valu-
ation when that does happen. So, I’d say—and
again, no clear answer here—but it does feel like
it is still an attractive time. Whether it’s an IPO,
M&A, or taking on additional debt, the markets
are still all open. It’s just not totally clear for how
long.
Restaurant M&A
Putting the Story in Context: Historical Restaurant M&A Trends
7
Historical Restaurant Industry Transactions and Valuation Multiples
(number of deals) (average EV / EBITDA)
• Restaurant industry M&A deal
volume has surged, growing at
a nearly 23% annualized rate
since its recession-driven low
point in 2009
• Valuation multiples have
increased concurrently, peaking
at an average of 11.0x LTM
EBITDA through September of
2015
– Multiple expansion fueled
by proliferation of emerging
high-growth concepts,
coupled with increased
competition from
historically attractive equity
markets
Average target enterprise value ($ in millions)
$253 $361 $206 $264 $64 $416 $187 $418 $118 $834 $199
101
166
199
178 175
213
275
301
411
489
358
7.7x
8.6x
9.2x
6.7x
6.2x
8.2x
7.4x
10.5x
9.3x
10.5x
11.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
0
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD
2015
1

18. The M&A journal
18
Restaurant M&A
continued
Current State of the Industry: Equity Capital Markets
The Return of the Restaurant IPO• Sustained valuations near all-time highs
are encouraging many restaurants to
explore the public markets
• Recent historic performance of growth-
oriented IPOs underscores the premium
investors are willing to pay for high-quality
concepts with considerable potential to
expand
• Companies utilizing unconventional
methods, such as SPACs and spin-offs, to
capitalize on equity premium
• The recent resurgence of restaurant IPOs
looks poised to continue for the
foreseeable future
– Success of recent 2015 IPOs such as
Shake Shack, Habit Burger,
Bojangles’, and Wingstop evidence
the considerable investor demand for
the sector
– Numerous other companies are
rumored to be seriously considering
an IPO
6
13
10
5
54
50
58
2009 IPOs Acquired /
taken private
2012 Acquired /
taken private
IPOs Current
8
Current State of the Industry: Emergence of Fast Casual
Fast casual
20.4x
Total Enterprise Value / LTM EBITDA by Restaurant Sector
Quick service
15.0x
Full service
10.8x
• Restaurant industry innovation has largely been driven
by emerging fast casual concepts aligned with
evolving consumer preferences
• Pervasive appeal of fast casual, particularly among
Millennials, has caused many established concepts to
change strategies in attempt to reposition their brands
to capitalize on the segment’s success
• Fast casual companies trade at a significant premium
to both quick service (37%) and full service (90%)
segments
• Considerable success of recent fast casual IPOs,
such as Shake Shack, Habit Burger and Zoe’s, fuels
investor support and will continue to attract high-
quality growth concepts to the public markets
4.0x
8.0x
12.0x
16.0x
20.0x
24.0x
28.0x
9
Current State of the Industry: M&A
BuyerTarget
Mature Moderate GrowthEmerging High Growth
BuyerTarget
• Private equity funds are extremely active
– Considerable dry powder and
borrower-friendly credit markets
– No constraints on exit opportunities,
with M&A, IPO, and dividend recaps
all equally viable and attractive
– Non-traditional restaurant investor
activity (e.g., Revolution Growth /
sweetgreen) evidences compelling
opportunity offered by the industry
• Strategic buyers displaying elevated
interest as well, as mature companies
seek additional growth concepts to
supplement established business
– Headlined by Burger King’s $12-
billion acquisition of Tim Hortons in
December 2014
– Many strategic buyers looking to
emulate Buffalo Wild Wings’ strategy
of investing in emerging fast casual
brands
10
• Substantiation of statements and data
SEC comment letters frequently request the removal of
marketing language that is non-substantiable (e.g., “unique
market positions” and “powerful growth strategies”), and the
Staff also focuses on specific claims (e.g., “we use higher-
quality beef than our competitors” and “our staff provides
superior service”).
• Related party transactions
SEC comment letters frequently request additional detail with
respect to certain related party transactions, and new
standards for auditor review are now in place.
• Segment Reporting
SEC comment letters continue to question company
judgments about when segment reporting is appropriate.
12
The IPO Comment Process: SEC Focus Areas
Areas of SEC Focus in Restaurant IPOs
• Use of non-GAAP figures
SEC comments consistently focus on the use of
non-GAAP measures, and comment letters frequently
request specific, circumstances-based explanations for the
use of these measures and more detail with respect to the
reconciliation of non-GAAP measures to comparable
GAAP measures.
• Dependence upon a single supplier
SEC comments have consistently honed in on the use of a
single supplier, often requesting disclosure with respect to
what that supplier provides to the business as well as the
risks that dependence upon a single supplier for all or a
substantial portion of particular goods or services poses to
the company’s operations.
11
The IPO Comment Process: SEC Focus Areas
Areas of SEC Focus in Restaurant IPOs
• Restaurant companies are frequently involved in the
construction of new stores which they lease.
• In ‘build-to-suit’ lease transactions, various forms of
lessee involvement during the construction period raise
questions about whether the lessee is acting as an
agent for the owner-lessor or is, in substance, the
accounting owner of the asset during the construction
period.
• Once construction is complete, the company performs a
sales lease back analysis to determine if the asset and
obligation qualify to be removed from the balance
sheet.
• This is a highly-complex area of accounting that many
restaurant companies may have insufficient expertise to
address.
13
The IPO Comment Process: SEC Focus Areas
SEC Focus on Accounting: Build to Suit
2
4
6
3
5
7

19. 19
the M&A journal
• Leases that include stated fixed rent increases need to be
straight-lined, including cancelable renewal option periods
where failure to exercise would result in an economic penalty
• We have seen that restaurant companies have frequently had
problems with understating expense through not recognizing
the renewal options and rent increase clauses in their rent
expense calculations
• Some restaurant companies have also had issues in straight-
lining rent expense over the initial term, but including renewal
option periods in calculating the depreciation life of assets,
resulting in a misalignment of these periods and understating
expense
14
The IPO Comment Process: SEC Focus Areas
SEC Focus on Accounting: Deferred Rent
15
The Dual-Track Process: Benefits and Drawbacks
What are the benefits?
• Although synergies of the two
processes exist, dual-track
process increases expense and
management time on transaction
matters
• Electing an IPO does not result
in a full exit for owners in most
situations
• Often a longer process
• Logistical and visibility issues
make targeting IPO market
windows challenging
What are the challenges?
• Companies can flush out
potential bidders
• Process can maximize exit
proceeds by increasing
competition during an M&A
process
• Theoretical increase in
transaction certainty for seller, as
owner companies are not
necessarily reliant on third party
acquirors
• Companies can hedge their bets
and leave the final exit decision
as late as possible
The Dual-Track Process: Timing and Other Considerations
IPO / No
Interest in Sale
IPO / Receptive
to Inquiries from
Acquirors
IPO / Approach
Targeted
Potential
Acquirors
Dual Track –
IPO / Full M&A
Process
Full M&A
Process /
Threaten to File
IPO
Full M&A
Process /
Mention IPO as
an Alternative
Full M&A
Process / No
IPO
Consideration
HybridPure M&A Public Equity
Process Considerations
• No continued business execution risk
• Low participation in future upside
• Potential exposure of information to
competitors
• Complete and most immediate
liquidity benefit
• Most thorough process
• Provides assurance that the highest
valuation was generated
• Most time and resource intensive for
management
• Highest deal costs
• Ability to participate in future upside
• Greatest exposure to equity market
fluctuations
• Continued business execution risk
• Exposure to scrutiny of public markets
and SOX compliance
• Partial liquidity issue
16
Non-GAAP Metrics: Trends in the Industry
Metric Reported byPurpose
Same-store sales growth
• Regularly updates investors on the health and
performance of a concept’s core units (typically
those operating for at least 12 or 18 months)
• All restaurant companies, on both a
quarterly and annual basis
System-wide
sales
• Gives sense of a concept’s overall scale,
independent of unit ownership
• Companies with significant franchised
component (~50%+)
Average unit
volume
• Highlights standalone units’ revenue generating
potential
• Majority of companies (annually)
• Limited number (primarily very heavily
franchised) do not report
Adjusted
EBITDA
• Used as gauge of recurring earnings generated by
company’s core business and as a proxy for
operating cash flow
• All IPOs since 2014
• Historically less of a focus, though
other public concepts beginning to
report as well
Cash-on-cash
returns
• Estimate of new unit returns
• Historically company-owned focused, increasingly
reported by franchised concepts to highlight ability to
attract franchisees
• Select companies with attractive
returns, though increasingly common
from both company-owned and
franchised models
18
• Regulation G requires that whenever an issuer publicly discloses any material
information that includes a non-GAAP financial measure it must provide:
• A presentation of the most directly comparable GAAP financial measure
• A quantitative reconciliation of differences between the non-GAAP financial measure and the
most directly comparable GAAP financial measure
• Item 10 of Regulation S-K requires companies using non-GAAP financial
measures in SEC filings to provide:
• Presentation, with equal or greater prominence, of most directly comparable GAAP measure
• The same quantified reconciliation as required by Regulation G
• A statement disclosing the reasons why the company’s management believes that presentation
of the non-GAAP financial measure provides useful information to investors regarding the
registrant’s financial condition and results of operations
• A statement disclosing the additional purposes for which management uses the non-GAAP
financial measures
17
Non-GAAP Metrics: Compliance with Law
19
Trends Driving the Restaurant Industry
The Power of Millennials
• Millennials’ eating habits and
preferences are notably different from
their parents:
• 53% eat out once a week, compared
with 43% of the general population
• Millennials care more about food that
is “fresh, less processed and with
fewer artificial ingredients” than prior
generations
• Fast casual is the preferred format:
Millennials comprise 51% of fast
casual customers
• Millennials are more likely than their
parents to express interest in
companies with good social ethics
• Millennials have specific focus areas in
selecting restaurants, and the industry is
working to address their preferences:
• 55% of Millennials prefer communal
tables at restaurants
• 68% of Millennials ask friends before
selecting a restaurant
• 40% of Millennials will order
something different every time they
visit the same restaurant
• 30% of Millennials eat foods that are
certified organic
• 87% of Millennials will spend money
on a nice meal, even when money is
tight
8
10
12
9
11
13

20. The M&A journal
20
The M&A Journal
the independent report on deals and dealmakers
Editor/Publisher John Close
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Restaurant M&A
continued
20
Trends Driving the Restaurant Industry
The Focus on Healthy Options
• 88% of individuals recently surveyed by Nielsen are willing to spend more for
healthier foods
• Research conducted by the National Restaurant Association indicates that 70% of
adults are trying to eat healthier than they did two years ago
• 80% of restaurant operators report that their guests focus more on the nutrition
content of food than guests did two years ago
• Gluten-free, low-carbohydrate and high-protein options
• The emergence healthy fast-casual:
• Organic food-focused restaurants, salad and specialty options
• Whole Foods’ recent investment in Mendocino Farms further illustrates the
broad appeal of fast-casual and the desire of even non-traditional restaurant
investors to involve themselves in the segment
21
The Restaurant Industry in 2016 and Beyond
• With today’s high valuations, sellers will be attracted to selling smaller
concepts, but buyers are concerned about the cost and the financing
options. How will that struggle play out?
• Will high valuations be the rule or will turbulence in public companies bring
down valuations across the segment? And how will public companies
perform hitting earnings targets?
• The new interest in the sector by non-traditional industry investors: Is this
an anomaly or a trend? Is grocery blending into restaurants?
• How will restaurants use social media in the coming year?
Our Questions as We Look Forward
14
15